With oil and the energy market grabbing headlines, there’s been another commodity slowly on the rise in the background: silver.
Despite its quiet rise to market fame, silver is the best performer in the Bloomberg Commodity Index this year, with roughly a 20% gain to about $17 an ounce.
This follows a tough patch for silver bulls. The metal hit a 31-year peak of $48.44 per ounce in April 2011 before falling to $13.63 in December of 2015 – its worst performance since September 2009.
Such a dramatic change in such a short time… and now in 2016, it sees another surge in value – and all for good reason.
Just a Shiny Afterthought
One of the primary instigators of silver’s rise in valuation is, quite simply, supply.
Unlike oil – where the international market is practicing dramatic overproduction in a race to the top – there’s increasingly less silver being mined, the world over.
Most consumers remain unaware that silver is largely unearthed as a by-product of mining other metals. Less than a quarter of the silver on the market actually comes from dedicated silver mines.
Because silver occurs naturally in ores containing other metals – such as copper, lead, and gold – and because these other metals are suffering a dramatic market slump, less of all four of them are being mined, at all. However, the demand for silver hasn’t decreased accordingly, so the market has adjusted to reflect its scarcity.
According to the Silver Institute, silver output will fall 5% this year.
In other words, silver is merely an afterthought for most big miners.
Even the world’s biggest producer of silver, Fresnillo Plc (FNLPF), makes more money mining for gold than it does in silver production.
The fact that silver is often just a by-product is reflected in the fact that, since 2011, the rankings of the top five producers have experienced several changes in line-up.
So unless metals prices soar – especially those of base metals – the silver supply will remain constrained.
A Surge of Silver
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Another factor in this year’s rise in silver valuation is the usual elephant in the commodities “room” – China.
The China Construction Bank joined the London Bullion Market Association (LBMA ) silver benchmark-setting process in March. This means that the Chinese renminbi is now being offered in exchange for silver futures contracts that can be settled in an actual, physical delivery of silver.
But even before that, Chinese investors had been piling into silver.
According to UBS, trading of silver futures contracts on the Shanghai Futures Exchange hit a 12-month high recently.
The Chinese government itself is adding to its reserves.
In the first quarter of 2016, China bought 345.1 metric tons of silver, increasing its silver reserves by 175%. This isn’t surprising, considering China’s close relationship with silver goes back to the Han Dynasty.
The Future of Ag
Silver is also experiencing a drop in supply from secondary sources such as recycling and sales from the Russian government, which is a large-scale seller of the metal.
Still, relatively low prices mean that silver producers are not hedging their production, which would put a cap on prices. This is in stark contrast to shale producers, which are aggressively hedging their oil output.
Holdings in silver ETFs are soaring, too. The latest reading at 19,904 metric tons is within 2% of the all-time high of 20,182 tons reached in 2014.
However, the rush (by speculative players) into silver – like any bull market – has the potential to result in the silver market being overwhelming. The rush was brought on, at least in part, by Janet Yellen’s apparent phobia of raising rates.
In response, money managers increased their long bets on silver futures to the highest level since the Commodities Futures Trading Commission data began in 2006.
When speculators rush in – as they’ve done time and again with the oil industry – there’s cause for concern. A pullback may be around the corner.
But with long-term fundamentals improving, any pullback is an opportunity to buy.
Investors should consider a physically-backed ETF such as the ETFS Physical Silver ETF (SIVR).
Or for a more daring, leveraged play on silver prices: the Global X Silver Miners ETF (SIL) will give investors even more bang for their buck.